It’s tough not to get discouraged when the news you hear seems unrelentingly dour. The year-over-year drops in transaction volume have been a regular negative drumbeat, though there’s more subtlety in events than the headline numbers make clear.
Not that everything is secretly roses, but, as MSCI wrote, “The headline figures for deal volume growth in February paint a bleaker picture than the reality. Deal structure has clouded recent trends in growth, with one-off entity-level deals pushing activity above trends last month and a year ago. Still, conditions are not great, and even looking past the impact of entity-level deals, investment activity fell in February.”
In other words, conditions are still volatile and even chaotic. Investors and developers keep waiting for growing levels of transactions to help pricing discovery so they feel safe in reentering markets, but they need to reenter markets to increase levels of transactions to enable that discovery. Currently, it’s a positive feedback loop, which in systems theory ends up a negative thing, like stomping on a car’s accelerator instead of the break when the vehicle is speeding toward a brick wall.
According to MSCI’s data, entity level sales composed 25% of all transactions in February 2023, creating a challenging baseline when this February there were no such transactions. That said, the flip side is the reality — no entity-level sales last month, which is its own statement of conditions.
The double-digit year-over-year transaction volume decline has been in place for 19 months, MSCI says. After the Global Finance Crisis, the pattern ran 27 months. Back then, at 19 months the trend was accelerating. Now it’s slowing, which is better news, but still no telling what might eventually happen.
After a displacement by retail entity sales in January, multifamily was again the leading sector for sales. That’s particularly interesting given that JP Morgan Chase checked its multifamily portfolio for potential weakness. Minutes of the Federal Reserve’s Federal Open Markets Committee January meeting mentioned multifamily as a real estate concern — the only property type they specifically mentioned with office. Multifamily weakness has been receiving increased attention.
That attention is, by nature, a retroactive look at data. But the ongoing transactions are activity that haven’t received archived status. Maybe this is an indication of reaching bottom. Or maybe the bottom is still a long way off.
“Price declines continued to moderate in February,” MSCI wrote. “The RCA CPPI National All-Property Index fell at only a 4.0% pace from a year earlier. This index posted an 11.2% annual decline as recently as July of 2023. Prices peaked in July of 2022 and have fallen a cumulative 12.2% to February of this year.”